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Don't Short Tesla

|Includes: Tesla, Inc. (TSLA)

Don't short Tesla unless you are confident the market is overestimating the value of autonomous driving technology.

Companies in the lead in self driving such as Nvidia, Uber, and Google have very high valuations relative to fundamentals.

Tesla's stock price likely will remain high due to the high price an acquiring company would pay. Even if Tesla ran short of cash, the possibility of acquisition could protect the stock.

I am not convinced by recent arguments for shorting Tesla. I am not currently long Tesla, as I view it as an extremely risky stock. However, there are good reasons for its high valuation that shorts are overlooking - principally the high valuations of other companies in the lead in the self driving race. Also, the possibility of an acquisition will probably keep a floor under Tesla's stock price. 

If you are shorting Tesla, you should consider Nvidia's valuation, the price Intel paid for Mobileye, Google's valuation and Uber's valuation. The high valuations of these companies show that the market is bullish on autonomous driving. Once Waymo is spun out of Alphabet we will have further data from Waymo's valuation. Companies perceived as in the lead in autonomous driving technology have huge P/E multiples. Compare Nvidia's P/E of 47.77 and market cap around $98.87 billion to AMD (market cap of $12.19 billion) and Intel (P/E of 13.71, market cap of $168.8 billion). Nvidia is clearly in the lead in autonomous driving, with Tesla and Audi both using Nvidia computers. Nvidia's lead in graphics chips and cryptocurrency is not large enough to justify its large P/E multiple compared to AMD or Intel. The market thinks Nvidia's position in the self driving race justifies a huge premium above its competitors.

Google, with its P/E of 30.73, has been a leader in self-driving cars for some time while Apple, with a P/E of 18.34, has just recently entered the competition and lacks the big data experience probably necessary to succeed in this area. The different valuation multiples for Google and Apple obviously reflect more than their different likelihoods of success in the selfdriving car race, but it shows investors value big data and machine learning expertise. Uber's current business model doesn't actually make any money, and yet it is valued around $50 billion. Uber, along with Google and Tesla, is a leader in autonomous driving and investing heavily in it. The text messages that recently surfaced between Levandowski and Kalanick show those two were closely following Tesla and Google. This implies Tesla is viewed as a leader and significant competitor in self driving field.  Intel paid an extremely high price of $15 billion for Mobileye, even though Mobileye had recently faced struggles (Tesla dropped Mobileye but still uses Nvidia). The price Intel paid for Mobileye works out to a P/E ratio around 130.  Qualcomm's acquisition of NXP was also likely related to gaining self driving expertise.

Tesla has a strong brand, and is currently a leader in the luxury car market in the U.S. It is considered one of the most prestigious places to work in Silicon Valley, and it will continue to attract top talent. With some of the best engineers, Tesla will likely maintain its position in the self driving race. Tesla's market value slid significantly after news of a crash while Autopilot was engaged (the crash turned out to not be related to Autopilot). The large stock slide following this incident implies significant portion of Tesla's valuation is based on its Autopilot software. 

Comparisons of Tesla to other car companies' market capitalization, which are popular in the press, are not informative. Since Tesla has not taken out much debt until recently, Tesla's market capitalization should be compared to the enterprise values of Ford (EV around 150 billion) and GM (EV around 115 billion) - Ford and GM do have a lot of debt. The enterprise values show that Tesla's valuation is still significantly below both companies. However, if Tesla were acquired, the acquiring company would definitely have to pay a premium over its current market capitalization. Tesla would make an attractive target for Apple or for the handful of other companies who could afford it. Its brand and workforce would provide considerable value even if Tesla were not making any money. Levandowski received a $120 million bonus from Google, so Tesla's valuation is only 500 times greater than one self-driving expert. Considering Tesla's brand, workforce, and prominent position in the self driving race, even if Tesla faced a cash crunch, it would make an attractive acquisition target.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.